Ferrexpo declares special dividends amid falling earnings

Ukraine’s largest producer and exporter of iron ore pellets Ferrexpo (FXPO LN, FXPOLN) said its revenue decreased 12.2% yoy to USD 1,388 mln in 2014, according to its annual report filed on March 11. The company’s top line was affected by a decline in its average realized pellet price by about 16%, which was only partially offset by increased pellet shipments by 4.5% yoy in 2014.

 

The company’s C1 production costs declined 23% yoy to USD 46/t, mostly due to devaluation of local currency. The company increased its donations to local communities 3.9x yoy to USD 39 mlm, which impacted its earnings items. Its unadjusted EBITDA came in at USD 496 mln in 2014, a 2.0% yoy drop and 17% yoy decline to USD 420 mln if adjusted for the non-cash ForEx gain.

 

Ferrexpo’s bottom line declined 30.3% yoy to USD 184 mln in 2014, mostly affected by impairment of its portfolio investment in Ferrous Resources (which generated USD 82 mln in non-cash losses).

 

Net of this impairment charge, Ferrexpo’s profit would have been 0.8% higher yoy. Its diluted EPS plunged 32% yoy to USD 0.304 /share, contrary to consensus expectations of USD 0.407 /share (a 25% negative surprise). Despite falling adjusted EBITDA and EPS, and the worsened iron ore price outlook, Ferrexpo’s board proposed to pay out a special dividend of 6.6 U.S. cents per share for 2014, on the top of an ordinary dividend of 6.6 cents/share.

 

The company’s net operating cash flow increased 24% yoy to USD 288 mln, mostly due to the working capital release stemming from selling VAT bonds, which is a one-off event and without which the net operating cash flow would have fallen.

 

Ferrexpo’s net debt decreased 5% to USD 678 mln during 4Q14, but net debt-to-LTM EBITDA worsened to 1.4x at the year end from 1.2x as of end-3Q14.

 

Positively, all of the pellets produced in February 2015 were 65% grade pellets, while previously the product mix had been equally split between 62% and 65% grade pellets.

 

Roman Topolyuk: Ferrexpo reported unadjusted EBITDA 9% higher and net income 8% higher than our expectations, with its top line basically in line with our projections.

 

A key disappointment from the report is on the corporate governance side. The board’s intention to distribute special dividends (at a total of USD 37 mln), after giving USD 29 mln more yoy in charity in 2014, is being done effectively at the expense of Ferrexpo’s bondholders, who agreed to postpone the repayment of USD 161 mln of the company’s 2016 bond for 2.5 years.

 

Such a decision also looks a bit inconsistent taking into account that the company’s net operating cash flow – if adjusted for one-offs – is on a downward trajectory It’s the second such case on the Ukrainian market – after Metinvest’s restructuring in 2014 – in which the shareholder majority is pursuing a Eurobond restructuring, but doesn’t seem to be eager simultaneously to tame substantially its appetite for dividends.

 

We maintain our neutral view on FXPOLN Eurobonds while still acknowledging that iron ore fines prices have fallen 10% since mid-February to USD 58/ton (China port, CFR). Thus, the estimated spread between pellet market price and delivery cost of Ferrexpo’s pellets to China – plus what the company should earn to keep creditors satisfied – was squeezed from USD 16/t to USD 10/t, which is a negative development.